Chapter 10

The Origin of Hedge Fundsa

Hedge funds entered the financial world’s consciousness in April 1966 when an article by Carol J. Loomis appeared in Fortune. The article, titled “The Jones Nobody Keeps Up With,” revealed that the fund with the best five-year record and the fund with the best 10-year record were the same fund—a fund that despite its remarkable performance achievement was virtually unknown. The fund that Loomis heralded was not a mutual fund, but rather a limited partnership, founded by Alfred Winslow Jones, that charged its investors a 20 percent incentive fee and utilized hedging and leverage. Jones’s fund with its unusual structure and strategy absolutely trounced the entire field of mutual funds. For the prior five-year period, the fund had a cumulative return of 325 percent versus 225 percent for the best-performing mutual fund (Fidelity Trend Fund). For the prior 10-year period, the fund had a cumulative return of 670 percent, almost double the corresponding 358 percent return for the top-performing mutual fund (Dreyfus). Moreover, these comparisons understated the magnitude of Jones’s outperformance, since the figures cited by Loomis were net returns after deducting the 20 percent incentive fee.

Today’s $2 trillion hedge fund industry has its origins in the $100,000 general partnership started by Alfred Winslow Jones in 1949,1 which operated in virtual obscurity despite its stellar performance until its anonymity was shattered by the Carol Loomis’s article ...

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